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CLIN Cost Overrun on Multi-Year Task Order


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All –

Background:  We are a small business with a IDIQ contract with the Department of Defense.  The company was awarded a Level of Effort type Task Order with a Base period and two option years – each with different CLINs and sequential periods of performance that basically followed the calendar year (not the fiscal year) using one year money.  Due to an accelerated timeline (requested by the government), Option Year 1 funds were exhausted after 10 months (of the 12 month option year)…. We provided notification of 75%, as well as estimates of additional funds needed to continue.

The government initially intended to increase our level of effort / level of funding for the option year and we agreed to go at risk while that was “finalized” (I know, I know).  However, because the additional funds were FY 2018 money the government then (after 2 weeks at risk) decided that they couldn’t add 18 funds to the “2017” option year (even though the POP extended into FY18 and the tasking related to FY18 activities) and instead decided to exercise Option Year 2 early. 

Based on the “at-risk” work, we do not expect to need the full level of effort / funding to complete the tasking on the final option year.  As a result, the total cost / fee on the Task Order will likely be below the total Task Order funding…. There is no “limitation of CLIN effort / funding clause” which I have seen referenced on other posts but each CLIN had an estimated cost / fee (and as mentioned was funded with one year money). 

Question 1:  What (if anything) do we need to do now related to the cost overrun (with DFAS, PCO, etc.)

Question 2: Can a cost overrun on an individual CLIN be recouped if there are available funds on the task order overall when we close out the task (years from now) with DCMA?  

Next step is to hire a lawyer / expert, but any help you could provide will help me get to the point quickly (and save a few bucks on those hourly rates)!

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Guest Vern Edwards
12 hours ago, Justice1 said:

Question 1:  What (if anything) do we need to do now related to the cost overrun (with DFAS, PCO, etc.)

Question 2: Can a cost overrun on an individual CLIN be recouped if there are available funds on the task order overall when we close out the task (years from now) with DCMA? 

Seven questions:

1. Option 1 ran from 1 Jan 2017 to 31 Dec 2017 and was funded with Fiscal Year 2017 money. Is that right?

2. The final option ran from 1 Jan 2018 to 31 Dec 2018 and is funded with FY 2018 money. Is that right?

3. During Option 1 you ran out of LOE and funding after 30 Sep 2017, during FY 2018, and you then worked at risk. Is that right?

4. The work performed at risk was done after 30 Sep 2017. Is that right?

5. The government had planned to increase the Option 1 LOE and funding using FY 2018 funds, but then decided that they could not do that. Is that right?

6. You have not been paid for the work done at risk during Option 1. Is that right?

7. You want to know if there is any way to get paid for the work done at risk during Option 1 with the unused FY 2018 funds obligated for the final option. Is that right?

If the answer to each of those questions is yes, then I think that the government erred in thinking that they couldn't use FY 2018 funds to pay for the additional work done under Option 1 after 30 Sep.

I don't know why they thought they couldn't apply FY 2018 funds to Option 1. The addition of LOE to Option 1 would have been an out-of-scope mod. Since the out-of-scope addition of LOE would have been for work to be done after 30 Sep 2017,  during FY 2018, it would have been a bona fide need of FY 2018 and would have had to be funded with FY 2018 money. See Principles of Federal Appropriations Law 3d, Vol. I, Ch. 5. The government should be able to mod Option 1 to add LOE to cover the work done at risk, fund it with FY 2018 money, and then pay you for the work done at risk. They would have needed to justify and get approval for a sole source procurement. Depending on how the contract is written, it may have been improper for them to exercise the final option "early".

What you have ahead of you is a challenge in the art of persuasion. The biggest problem you would have in trying to get this fixed is that someone in the government is going to say that they cannot mod Option 1 after the fact, because it's "expired", "dead", and you cannot modify an expired/dead option. That would be wrong, but good luck convincing them. On the other hand, shame might prompt them to act on your behalf.

Do you have a valid claim for payment for the work done at risk? I don't want to speculate. You might if you retain a good lawyer. Otherwise...

BTW, it appears that the task order was cost-reimbursement. If so, you may not have had a "cost overrun" in Option 1. If you delivered the original LOE at or within the estimated cost, then the extra LOE you provided at risk was not an overrun. It was additional work.

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Vern - Thanks for the response.  The answer to every one of your questions is YES.   Having said that, I agree that we would have an almost impossible time convincing them to fix Option Year 1 now that they have exercised option year 2.  So....my thought is that the best chance that we have is to recoup the cost is during the Task close-out process with DCMA. Schedule I of our incurred cost statement is going to show a significant "under-bill" on the Task Order and as the the result of the "modifications" (option year exercise) the total level of effort and funded amount will be sufficient to cover the under-bill.  We have yet to close out a task order, so I'm not clear if they look down to the CLIN level or just the overall task order (which is how it shows in our incurred cost worksheets) 

You are correct about it being a cost reimbursable contract....and in this case the "extra work" was requested by the government. 

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Guest Vern Edwards

Because of the funding and contract structure they would look down to the CLIN level.

It doesn't matter that the government requested the extra work. You knew that you didn't have to do it under contract and that it wasn't funded. You took your chances. I don't know what your chances are with DCMA, but I suspect they're not good.

Be careful about invoicing for payment to which you know you are not entitled under the terms of the contract. "Under bill" might be a false claim.

Sympathy with small businesses goes only so far. Most people in the contracting business will not feel sorry for a company that performed at risk and can't get paid for it.

Consult an attorney before you do anything.

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Appreciate the insight - Last question.  The loss of revenue / increased expense has cause our indirect rates to increase above that included in our provisional rates.  However, as discussed, we will have invoiced the full CLIN level of effort / funding (nevermind the at risk work)...will we be able to bill this part of the additional / unanticipated cost overrun when we close the contract....and does the funding to cover it have to be available from the same fiscal year?

Thanks again for the help (even if the answers not exactly what we had hoped for)

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Guest Vern Edwards
4 minutes ago, Justice1 said:

will we be able to bill this part of the additional / unanticipated cost overrun when we close the contract....

I'm not sure. You should consult an attorney.

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3 hours ago, Vern Edwards said:

You should consult an attorney.

Vern is correct.

That said, whether or not you can recover increased indirect rates allocated to in-scope work, in excess of funding, will turn on whether the rate increases were truly "unanticipated"--which is to say, a complete surprise.

Given your scenario, I'm skeptical. I cannot see a connection between the situation you describe and an increase to indirect rates. The direct labor that you charged to the CLIN in excess of funding will still receive applicable indirect burdens. Consequently, I don't see how that "extra" labor is in any way connected to your increased indirect rates.

Had you stopped work when you reached your funding limits, you might be on stronger ground, because then you could argue that your provisional billing rate calculations were based on a full year's worth of direct labor, and the resulting shortfall in direct labor led to higher indirect rates than originally calculated. But given your scenario, I'm not seeing it.

Hope this helps.

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Guest Vern Edwards
15 minutes ago, here_2_help said:

Had you stopped work when you reached your funding limits, you might be on stronger ground, because then you could argue that your provisional billing rate calculations were based on a full year's worth of direct labor, and the resulting shortfall in direct labor led to higher indirect rates than originally calculated.

help:

It was a level of effort task order. What if the contractor delivered the full level of effort, but delivered it sooner than planned, which seems to have been the case? There was no shortfall in direct labor, but it was expended in less than a year. How if at all would that affect the contractor's argument?

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Justice1, how did the additional expense cause your indirect rates to go up?  Indirect cost rates usually work in the inverse to direct costs.  Thus, if direct costs go up, indirect costs usually go down.  Indirect cost rates should not be affected by revenue since they are based on costs, both direct and indirect.

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1 hour ago, Vern Edwards said:

help:

It was a level of effort task order. What if the contractor delivered the full level of effort, but delivered it sooner than planned, which seems to have been the case? There was no shortfall in direct labor, but it was expended in less than a year. How if at all would that affect the contractor's argument?

Yes. I got that. I was just trying to be nice. Also thinking about other readers, who may be facing a situation closer to the one I described.

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1 hour ago, Retreadfed said:

Justice1, how did the additional expense cause your indirect rates to go up?  Indirect cost rates usually work in the inverse to direct costs.  Thus, if direct costs go up, indirect costs usually go down.  Indirect cost rates should not be affected by revenue since they are based on costs, both direct and indirect.

Yes. This.

Also, the only reason that the LOE hours were burned faster than anticipated is because the contractor's labor was more expensive than anticipated. Either (a) the wages paid to direct-charging employees were higher than budgeted/bid, or (2) the indirect rates actually experienced were higher than budgeted/bid. (Or a combination of 1 and 2.)

The story may well turn out to be that the small business didn't do a good job of forecasting indirect rates and actuals came in higher than anticipated (for whatever reason), which caused the LOE hours to be burned faster than planned. Happens all the time.

Next question for Justice1: for purposes of complying with the Limitation of Cost/Funds clauses in your contract, did you use your provisional billing rates or did you use your YTD actual indirect rates or did you use a combination of YTD actual rates plus a forecast of where you expected those rates to be at year-end? One of those choices is wrong, one is right, and the other is kind of in the middle.

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Sorry for the delay - We have billed our provisional rates.  However, we updated our provisional rates with DCAA (and began using going forward once approved) in July based on the actual to date and new revenue assumptions (moved upward) based on the accelerated schedule.  Because this additional revenue was expected with little additional G&A / overhead, it had the affect of pushing down the rates.  Now with that revenue gone, as well as overhead / admin costs relates to this pushing us above estimates, the indirect rates are higher. 

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Guest Vern Edwards

The following is from training materials published online (https://www.google.com/search?q=G%26A+allocation+base&rlz=1C5CHFA_enUS628US655&oq=G%26A+allocation+base&aqs=chrome..69i57.5439j0j7&sourceid=chrome&ie=UTF-8):

Selecting a G&A Base

Background

In general, Government contractors are constrained to use of three specific bases for allocation of the General and Administrative (G&A) costs of the organization. The bases are defined in Cost Accounting Standard 410 (48 FCR 9904.410), but are incorporated into the FAR in 31.203.

First and by far the most common of the three is the cost input base, often referred to as Total Cost Input or TCI. With the TCI base, all costs that are not G&A and not statutory unallowables (such as interest or Federal income tax) are part of the G&A base. It is also the simplest of the G&A bases and usually (but not always) accepted by Government auditors without any real question.

Second most common and growing in popularity is the Value Added G&A base. With this allocation base, material costs and certain subcontracts are excluded from allocation of G&A. Such costs may or may not be subject to allocation of other kinds of costs. Many firms using a value added G&A base collect the cost of purchasing, processing, and administering (but not managing) materials and subcontract purchases in a so-called Material Handling or Material & Subcontracts pool. These are often referred to as MH or M&S pools and the costs collected in such pools are applied to materials and subcontracts in lieu of G&A.

The third and somewhat rare G&A base is called Single Element. It is sometimes also referred to as a single pool allocation because the methodology involves collection of all indirect costs in a single pool and allocation of those costs over a single cost element (such as labor). Such a pool would include everything from fringe benefits to facilities costs to bid and proposal costs. It is intended for use by very small services companies – usually on a manual or semi-manual system – as an administrative convenience. It is rarely approved by auditors and is therefore only seen primarily in firms prior to their first audited contract.

The Government’s Position on G&A Allocation Bases

In the regulation (FAR and CAS) and in the audit guidance (such as the Defense Contract Audit Manual or DCAM), the official position is that each company should use the allocation base for G&A that best reflects total business activity and, therefore, results in the most equitable allocation of G&A expense across all contract (both Government and commercial). In theory, the Government has no preference for one base over another so long as the resulting allocation is equitable.

In reality, the Government has traditionally been heavily biased toward the TCI base and resisted efforts of contractors to change to the VA base. Recent Government regulation, however, has been aimed at making “excessive pass-through costs” unallowable on Government contracts. Translation – the Government really doesn’t want to pay for G&A on large subcontracts. (Please see separate whitepaper on Excessive Pass-Through Costs) This has resulted in a slowly shifting attitude towards use of the VA base for allocation of G&A expense.

The new regulation on excessive pass-through costs has an exception in it specifically to allow the costs of Material Handling or Material & Subcontract rates. For this reason, many Government contractors currently using a TCI base are considering a switch to the VA base. 

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Guest Vern Edwards

I do not think Justice1's company experienced a cost overrun. What happened was that the contractor completed the LOE two months before the period of performance expired. The company continued to work during the remaining two months, delivering additional level of effort without contractual coverage. The government had planned to buy additional LOE during the remainder of the period of performance, but balked for some reason, exercising an option early, instead. The contractor has not been paid for the extra work performed during the final two months.

The result is that the contractor has not recovered some G&A costs incurred during the last two months of the period of performance. In my opinion, unless the government agrees or is forced to pay for the unfunded, voluntarily performed additional LOE, the company has no chance of recovering the last two month's G&A. The job was over after 10 months.

This is what happens when people dealing with the government don't think and act contractually. You cannot deal with the government the way you deal with private sector firms, where much is done by handshake.

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On the indirect rate issue - Let me give a less rushed answer with additional information.  As mentioned above, our provisional rate was based on expectation of more work (and therefore G/A base cost for direct labor) being completed during 2017.  When we faced going at risk, we slowed our delivery to essential activity - specifically, most direct partial-fringe (hourly) employees that supported the contract were stopped (less G&A base)....then when the government felt forced to switch tactic to the early option execution, we stopped completed for a period of weeks while that process played out.  During that time - no direct partial fringe (less G&A base) and the salaried direct employees either switched projects, took leave (increase to fringe) or conducted admin activities as appropriate (higher G&A pool / lower G&A base).  The result is higher indirect rates than anticipated in the provisional  - with the full CLIN level of effort already expended (based on belief that the additional funding was being added to the current option).  The rate issue is less the direct cost for "voluntarily" performed LOE (which I appreciate all the previous input on) and more that the expectation of that additional (and preferably contractual) LOE had led to provisional rates that had to be adjusted upward when the Government changed course which we did not anticipate (as demonstrated by our going at risk in the first place).

I welcome any other thoughts that might be relevant.  Based on the feedback, we (with professional support) are going to be pushing the government to modify option period 1 despite the fact that option period 2 is now in place.

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Guest Vern Edwards

Justice1:

Nothing you related in your last post changed my mind. You are entitled to nothing for G&A during the period of voluntary performance unless the government decides to compensate you for the voluntary performance or a board or court forces it to do so.

We don't have all the facts tbat we should have, but if you had an LOE contract and you delivered the stipulated LOE, albeit sooner than expected, then your obligation to perform was over, even though the period of performance had not expired. I am basing my conclusion on your description of the contract as obligating your company to deliver up to a stipulated level of effort. If your description is wrong or incomplete, then I might change my position based on the true facts.

It may be that an attorney can persuade the government to agree, or can persuade a board or in court, that the government's acceptance of your work obligates it to pay you, in which case you should be able to get your G&A. You must consult an attorney to see what the chances are.

Frankly, I think you are wasting your time here. You could get all sorts of opinions, none of which you would be in a position to evaluate. In any case, our opinions don't count. The only opinion that should count is that of a good government contracts attorney that you're paying for an opinion.

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  • 2 weeks later...
On 12/16/2017 at 12:52 PM, Vern Edwards said:

The only opinion that should count is that of a good government contracts attorney that you're paying for an opinion.

Nope, the only opinion that counts is the opinion of he who enforces or chooses to not enforce the final decision.

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